Falling Margins May Bring Panera Back From Orbit

After coming to a boil it appears that shares of Panera Bread (Nasdaq: PNRA) might finally be headed for that cooling-off period I've been incorrectly calling for since last March.

Panera has proven me wrong on multiple occasions. I had been expecting rising food costs to cut into its margins, and I assumed that its strong year-over-year same-store sales figures simply couldn't be matched. Up until now, I looked like a fool -- and not in the good way. Last night could be my first step toward vindication.

And the day is mine!
Don't get me wrong, the results themselves weren't bad. In all respects, if you're a Panera Bread bull, you aren't too disappointed with the company's fourth-quarter results. But, it was the first quarter in a long, long time where the company looked fallible.

Sales grew by 16% to $495.8 million, but came in shy of Wall Street's consensus estimate of $499.2 million. Panera's profits of $1.42 matched Wall Street's expectations, ending its five-quarter streak of surpassing the consensus EPS figure.

The number that really stood out though was its customer traffic which ticked up a pitiful 0.2%. Thankfully for Panera, spending per customer was up 5.7% -- and I would largely place that on price hikes the company passed along to the customer rather than its customers' willingness to actually choose to spend more.

Panera has always been a favorite growth stock in the food sector because of its willingness to attract new customers, but last night's figures gave us a stark reminder that consumer habits can change in an instant. Even though Panera's fiscal 2012 forecast remains in line with the current consensus figures, there are simply too many warning signs to ignore.

I'll play your game, you brigand!
For starters, the company's operating margin is expected to be flat with 2012 in large part because of the integration costs associated with its Raleigh-Durham acquisition. The company did raise its same-store bakery comps from a range of 4%-5% to 4.5%-5.5% in fiscal 2012, but I find those figures hard to hit, especially if new consumers aren't heading into its restaurants.

Panera's valuation is also a concern:

Source: Morningstar.

The first thing I notice on a side-by-side with some of its closest peers is that this sector in general isn't cheap. Any mistake or slowdown in this group is bound to hit their stock prices hard, especially with forward P/E's regularly above 20 (or in Panera's case approaching 30!). McDonald's, Starbucks, and P.F. Chang's offer a solid dividend and have all done a good job of driving new traffic to their stores. Dunkin' Brands, while not paying out a dividend, is still significantly cheaper than Panera on a book value basis. In short, there aren't many restaurants that can claim to be pricier than Panera based on fundamentals alone.

Finally, Panera's up against some very easy same-store comparisons which could make it the perfect time to part ways with the stock. Last year, an unseasonably cold winter put a big dent in its first-quarter same-store sales. This year the company will probably crush those figures and get investors psyched up about a strong year. Once the first-quarter is over, however, I feel the reality of stagnant traffic generation is bound to catch up with its bottom line, making some of Panera's lofty 2012 goals hard to achieve.

A man with a mustache!
In the end Panera isn't a lost cause -- it just doesn't make sense to me to buy the stock here at nearly 30 times forward earnings, especially when it's not paying a dividend. Sometimes we just need to call a stock out for what it is -- a high-growth restaurant play that's losing some of its pizzazz.

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